<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5881
------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 050113140
-------- ---------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Precision Park, 200 Frenchtown Road, North Kingstown, Rhode Island 02852
-------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(401) 886-2000
--------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
yes x no
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date; 12,965,649 shares of Class A
common stock, 506,796 shares of Class B common stock, par value $1 per share,
outstanding as of March 31, 1999.
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS*
- ------ --------------------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Dollars in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended Mar.31,
-------------------------------
1999 1998
-------------- ---------------
(Restated)
<S> <C> <C>
Sales $ 82,414 $ 83,456
Cost of sales Note 2 61,243 55,371
Research and development expense 2,522 2,746
Selling, general and
administrative expense 21,550 21,514
Restructuring charges Note 2 10,762 --
-------- -------
Operating (loss) profit (13,663) 3,825
Interest expense 1,411 1,468
Other income (expense), net 110 (38)
-------- -------
(Loss) Income before income taxes (14,964) 2,319
Income tax provision 83 537
-------- -------
Net (loss) income $ (15,047) $ 1,782
======== =======
Net (loss) income
per common share:
Basic and diluted $(1.12) $ .13
====== ====
Weighted average shares
outstanding 13,397,725 13,341,215
========== ==========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
Page 2
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Mar. 31, 1999 December 31, 1998
-------------- ------------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 5,532 $ 12,290
Accounts receivable, net of allowances for
doubtful accounts of $3,541 and $3,657 101,753 102,506
Inventories 83,815 88,391
Deferred income taxes 3,165 3,165
Prepaid expenses and other current assets 4,606 3,692
-------- --------
Total current assets 198,871 210,044
Property, plant and equipment:
Land 6,703 6,797
Buildings and improvements 42,432 43,919
Machinery and equipment 91,453 96,070
-------- --------
140,588 146,786
Less-accumulated depreciation 90,479 93,293
-------- --------
50,109 53,493
Goodwill, net 7,601 7,961
Other assets 39,653 46,280
-------- --------
$296,234 $317,778
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 47,083 $ 42,153
Accrued expenses and income taxes 46,818 48,045
Notes payable and current
installments of long-term debt 11,266 9,272
-------- --------
Total current liabilities 105,167 99,470
Long-term debt 64,365 65,433
Long-term liabilities 21,731 23,220
Shareowners' Equity:
Preferred stock, $1 par value;
authorized 1,000,000 shares -- --
Common stock:
Class A, par value $1; authorized 30,000,000
shares; issued and outstanding 13,008,241 shares
in 1999 and 12,926,385 shares in 1998 13,008 12,926
Class B, par value $1; authorized 2,000,000 shares;
issued and outstanding 506,796 shares in 1999
and 507,809 shares in 1998 507 508
Additional paid in capital 112,508 112,508
Retained earnings (deficit) (16,407) (1,360)
Other comprehensive (loss) income (4,190) 5,528
Treasury stock: 42,592 shares in 1999 and
in 1998 at cost (455) (455)
-------- --------
Total shareowners' equity 104,971 129,655
-------- --------
$296,234 $317,778
======== ========
</TABLE>
Page 3
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three-Months Ended Mar. 31,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Cash Provided by (Used in) Operations:
Net (loss) income $(15,047) $ 1,782
Adjustment for Noncash Items:
Restructuring charges 15,703 --
Depreciation and amortization 3,141 3,484
Unfunded pension 636 89
Termination indemnities 109 132
Changes in Working Capital:
(Increase) Decrease in accounts receivable (5,453) 402
Increase in inventories (6,081) (4,812)
(Increase) Decrease in prepaid expenses
and other current assets (301) 112
Increase in accounts payable
and accrued expenses 4,246 5,275
-------- -------
Net Cash (Used in) Provided by Operations (3,047) 6,464
-------- -------
Investment Transactions:
Capital expenditures (2,890) (3,026)
Sale of an investment 76 891
Investment in other assets (111) (752)
-------- -------
Cash (Used in) Investment Transactions (2,925) (2,887)
-------- -------
Financing Transactions:
Increase in short-term debt 2,616 257
Principal payments of long-term debt (390) (378)
Other financing activities (878) 703
-------- -------
Cash Provided by Financing Transactions 1,348 582
-------- -------
Effect of Exchange Rate Changes on Cash (2,134) (190)
-------- -------
Cash and Cash Equivalents:
(Decrease) Increase during the period (6,758) 3,969
Beginning balance 12,290 20,458
-------- -------
Ending balance $ 5,532 $24,427
======== =======
Supplementary Cash Flow Information:
Interest paid $ 285 $ 338
======== =======
Taxes paid $ 135 $ 287
======== =======
</TABLE>
* The accompanying notes are an integral part of the financial statements.
Page 4
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollars in Thousands)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1999.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Brown & Sharpe Manufacturing Company's
annual report on Form 10-K for the year ended December 31, 1998.
2. As part of an ongoing review of the Company's overall cost structure, the
Company announced, in the first quarter of 1999, certain major cost
reduction initiatives that were to be implemented at the PMI and CM
Divisions located in the United Kingdom. The purpose of the restructuring
at these Divisions was to reduce costs and improve profitability through
product line and factory rationalization which was to be achieved by
exiting certain non-core products at CM and certain products at PMI viewed
by the Company as "commodity-type" products.
As a result of the restructuring, the Company recorded, in the first
quarter of 1999, restructuring related charges amounting to $15.5 million
($1.16 per share). The charges provide for costs associated with
involuntary employee termination benefits for approximately 235 employees,
write-down of excess inventory to net realizable value, write-down of
impaired fixed assets and capitalized software costs, and other exit costs,
such as legal expense, lease cancellations, travel, etc. The inventory
adjustment of $4.9 million has been classified in the 1999 results in cost
of goods sold. The remainder of the restructuring expenses was recorded as
a separate component of the 1999 operating loss.
The following is an analysis of the 1999 restructuring charge and
associated reserves at March 31, 1999.
<TABLE>
<S> <C>
Employee termination benefits $ 3,144
Inventory 4,941
Capitalized software costs 5,624
Fixed asset 1,283
Other 711
-------
$15,703
=======
</TABLE>
The impaired fixed assets, amounting to $818 thousand at PMI and $465
thousand at CM, consist, primarily, of machinery and equipment which will
be disposed of sometime after June 30, 1999. The machinery and equipment
was considered to have no alternative use and was written down to its
estimated net salvage value.
Most of the impaired software costs pertained to a management information
system installed for CM, which will no longer be supported when CM
concentrates on its new factory charter focusing on the turbine blade
business. The existing software was considered too robust for the remaining
CM business and will be replaced with a less costly reporting system. As a
result, the existing software was written down because it had no
alternative use to the Company.
Cash payments related to the restructuring charges listed above amount to
approximately $3.9 million, most of which are expected to occur in the
third and fourth quarters of 1999.
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<PAGE>
In addition, in the first quarter of 1999, the Company made cash payments
amounting to approximately $535 thousand which related to employee
termination benefits recognized in the restructuring of certain of its
European operations in 1997. The reserve for the 1997 employee termination
benefits obligation, as well as the 1999 obligation for termination
benefits, is classified with accrued expenses and income taxes.
3. The composition of inventory is as follows:
<TABLE>
<CAPTION>
Mar. 31, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Parts, raw materials, and supplies $37,132 $38,511
Work in process 19,714 20,515
Finished goods 26,969 29,365
------- -------
$83,815 $88,391
======= =======
</TABLE>
4. Income taxes include provisions for federal, foreign, and state income
taxes and are based on the Company's estimate of effective income tax rates
for the full year. The tax provision for the first three months of 1999
and 1998 is $83 and $537, respectively.
5. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Numerator:
Net (loss) income $(15,047) $ 1,782
Denominator:
Denominator for basic earnings per share:
Weighted average shares 13,398 13,341
Effect of dilutive securities:
Employee stock options -- 149
-------- -------
Denominator for diluted earnings per share:
Weighted average shares and
assumed conversions 13,398 13,490
======== =======
Basic (Loss) Earnings Per Share $ (1.12) $ .13
======== =======
Diluted (Loss) Earnings Per Share $ (1.12) $ .13
======== =======
</TABLE>
6. Components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended Mar.31,
-------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
Net (Loss) Income $(15,047) $ 1,782
Other comprehensive (loss), net of tax:
Foreign currency translation adjustments (9,718) (2,422)
-------- -------
Comprehensive (loss) $(24,765) $ (640)
======== =======
</TABLE>
Accumulated other comprehensive (loss) income, net of related
tax, at March 31, 1999 and December 31, 1998 is composed of foreign
currency translation adjustments amounting to a loss of $4.2 million and
income of $5.5 million, respectively.
7. Environmental. On March 1, 1995, the Company received a notice from the
State of New York asserting a claim against it, along with a group of
approximately ten other companies, to recover
Page 6
<PAGE>
costs incurred by the New York State Department of Environmental
Conservation to clean up a waste disposal site in Poughkeepsie, New York.
The State has alleged that the Company's former subsidiary, Standard Gage
Company, Poughkeepsie, New York, acquired in 1987 and merged with and into
the Company in 1991, contributed hazardous waste to the site for disposal
and that the Company is a PRP as the surviving corporation to the merger.
The total claim asserted by the State against all parties is approximately
$500, with no volumetric assignment of responsibility having yet been
determined; however, the State has expressed a willingness to settle its
claim with all PRPs receiving the notice. The Company is continuing efforts
to settle this claim and believes that any potential loss it might incur as
a result of any involvement or settlement at this site would not be
material.
On April 20, 1998, the Company received a notice of responsibility letter
from the Rhode Island Department of Environmental Management informing it
that the Company is one of a group of at least twenty-five other companies
similarly notified that have responsibility under State environmental laws
and RIDEM regulations to perform investigation and remedial clean-up action
at the closed Sanitary Landfill site in Cranston, RI. The RIDEM has
indicated it believes the total cost of remediation of the Site to be in
the range of $3 to $4 million, and that there are numerous other
responsible parties who were not notified of their responsibility. The
Company has joined the working group of notified responsible parties to
propose a remedy to the State for the Site. At this time, the Company does
not believe it was a major contributor of industrial waste to the site or
that its potential liability at the site is material.
Product Liability and Other Litigation Incidental to the Business. The
Company is involved in a number of product liability claims and lawsuits by
plaintiffs seeking monetary damages for personal injury which arose out of
and were incidental to the sale of products manufactured by the Company in
its discontinued metal cutting machine tool and fluid power businesses and
certain other litigation and claims incidental to the conduct of its
business. The potential liability of the Company for these claims and suits
is adequately covered by insurance or reserves established for such
contingencies. The Company is contesting or defending these claims and
suits and management believes that the ultimate liability, if any,
resulting from these matters will not have a material effect on the
Company's financial position.
8. Financial Information by Business Segment
Segment Information. The Company operates exclusively in the Metrology
Business and conducts its business through the Measuring Systems Group
("MS"), Precision Measuring Instruments Division ("PMI"), and Custom
Metrology Division ("CM").
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
--------------------------------------
MS PMI CM TOTALS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues from
external customers $57,889 $21,811 $ 2,714 $ 82,414
Intersegment revenues 3 118 8 129
Restructuring provision -- 6,239 6,980 13,219
Segment profit (loss) 2,197 (5,649) (8,422) (11,874)
<CAPTION>
Three Months Ended March 31, 1998
-----------------------------------
MS PMI CM TOTALS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues from
external customers $57,480 $23,488 $ 2,488 $ 83,456
Intersegment revenues 4 177 393 574
Segment profit (loss) 572 1,774 (682) 1,664
</TABLE>
Page 7
<PAGE>
A reconciliation of combined operating profit for the MS, PMI, and CM
segments to consolidated profit or loss before income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Total revenues for reportable segments $ 82,543 $84,030
Elimination of intersegment revenues (129) (574)
-------- -------
Total Consolidated Revenues $ 82,414 $83,456
======== =======
Total profit (loss) for reportable segments $(11,874) $ 1,664
Corporate restructuring charges (2,484) --
Unallocated amounts:
Interest income 78 245
Other income (expense) (684) 410
-------- -------
Profit (Loss) Before Income Taxes $(14,964) $ 2,319
======== =======
</TABLE>
9. In 1998, the Company changed its method of accounting for its larger, more
fully configured machines from the percentage of completion method to the
completed contract method. As a result of the use of the new accounting
method described above, sales and net income for the three months ended
March 31, 1998 decreased $1.7 million and $268 thousand ($.02 per share),
respectively.
Also, certain other amounts reported in 1998 have been reclassified to
conform with the 1999 presentation.
Page 8
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
RESULTS OF OPERATIONS
(Quarter Ended March 31, 1999 compared to Quarter Ended March 31, 1998)
Sales.
Sales for the first quarter of 1999 were $82.4 million compared with first
quarter sales in 1998 of $83.5 million, which is 1.3% below the 1998 level.
First quarter sales for 1999 would have been $1.6 million lower than reported in
1999, if foreign denominated sales had been translated at 1998 foreign exchange
rates. The reduced U.S. Dollar value of 1999 foreign sales, which results from
translating the 1999 foreign denominated sales using lower exchange rates, is
due to the continued strength of the U.S. dollar. When 1999 first quarter sales
are translated at the first quarter of 1998 exchange rates, 1999 sales amount to
$80.9 million, a $2.6 million decrease over 1998. The $2.6 million sales
decrease was caused by a $0.7 million and $2.2 million decrease in the Measuring
Systems ("MS") and the Precision Measuring Instruments ("PMI"), respectively,
offset by a sales increase of $0.3 million in the Custom Metrology Division
("CM").
The $0.7 million decrease in MS sales was primarily due to an approximate $3.6
million decrease in the sales of certain of the smaller coordinated measuring
machines ("CMM") offset by an increase of approximately $2.2 million in
aftermarket revenue and $0.7 million sales of more fully configured CMMs.
Sales for PMI were down $2.2 million due, primarily, to decreased sales volume
in the United States caused by stock reduction and consolidation of U.S. catalog
distributors and a slowdown in the Asian markets. Sales for CM were up $0.3
million due to increased sales volume of Profile machines.
Restructuring.
As part of an ongoing review of the Company's overall cost structure, the
Company announced, in the first quarter of 1999, certain major cost reduction
initiatives that were to be implemented at the PMI and CM Divisions located in
the United Kingdom. The purpose of the restructuring at these Divisions was to
reduce costs and improve profitability through product line and factory
rationalization which was to be achieved by exiting certain non-core products at
CM and certain products at PMI viewed by the Company as "commodity-type"
products.
As a result of the restructuring, the Company recorded, in the first quarter of
1999, restructuring related charges amounting to $15.5 million ($1.16 per
share). The charges provide for costs associated with involuntary employee
termination benefits for approximately 235 employees, write-down of excess
inventory to net realizable value, write-down of impaired fixed assets and
capitalized software costs, and other exit costs, such as legal expense, lease
cancellations, travel, etc. The inventory adjustment of $4.9 million has been
classified in the 1999 results in cost of goods sold. The remainder of the
restructuring expenses was recorded as a separate component of the 1999
operating loss.
The following is an analysis of the 1999 restructuring charge and associated
reserves at March 31, 1999.
<TABLE>
<CAPTION>
<S> <C>
Employee termination benefits $ 3,144
Inventory 4,941
Capitalized software costs 5,624
Fixed asset 1,283
Other 711
-------
$15,703
=======
</TABLE>
Page 9
<PAGE>
The impaired fixed assets, amounting to $818 thousand at PMI and $465 thousand
at CM, consist, primarily, of machinery and equipment which will be disposed of
sometime after June 30, 1999. The machinery and equipment was considered to
have no alternative use and was written down to its estimated net salvage value.
Most of the impaired software costs pertained to a management information system
installed for CM, which will no longer be supported when CM concentrates on its
new factory charter focusing on the turbine blade business. The existing
software was considered too robust for the remaining CM business and will be
replaced with a less costly reporting system. As a result, the existing
software was written down because it had no alternative use to the Company.
Cash payments related to the restructuring charges listed above amount to
approximately $3.9 million, most of which are expected to occur in the third and
fourth quarters of 1999.
In addition, in the first quarter of 1999, the Company made cash payments
amounting to approximately $535 thousand which related to employee termination
benefits recognized in the restructuring of certain of its European operations
in 1997. The reserve for the 1997 employee termination benefits obligation, as
well as the 1999 obligation for termination benefits, is classified with accrued
expenses and income taxes.
Earnings.
The Company's net loss for the first quarter of 1999 was $15.0 million. The
first quarter net loss included $15.5 million of restructuring expenses, net of
taxes, discussed above. Excluding the effect of the restructuring expenses, the
first quarter of 1999 would have realized $0.5 million of net income, which
compares with $1.8 million for the same period in 1998.
The Company had an operating loss of $13.7 million in the first quarter of 1999,
which included, as discussed above, $15.7 million of restructuring expenses.
Excluding the effect of the restructuring charge, first quarter 1999 operating
profit would have been $2.0 million, which is $1.8 million below the first
quarter of 1998. The gross margin for the first quarter of 1999 was $21.2
million, which included $4.9 million of the $15.7 million restructuring
expenses. When the $4.9 million inventory adjustment is excluded from cost of
goods sold, the 1999 gross margin is $26.1 million, which is 31.7% of 1999
sales. This compares with a 1998 first quarter gross margin of $28.1 million,
which was 33.7% of 1998 sales. The $2.0 million decrease in gross margin is due
to lower margins amounting to $0.9 million, $0.7 million, and $0.4 million for
MS, PMI, and CM, respectively. The reduced gross profit of $0.9 million for MS
was due to costs relating to unfavorable absorption for certain of the smaller
CMMs and increased costs for aftermarket products, which included increased
training and other start up expenses required to grow the service component of
the aftermarket business. The adverse impact on MS gross profit was mitigated
by higher margins in the more highly configured CMMs. The PMI gross profit is
down due to lower sales volume, while CM gross profit is down due to product
mix.
Most selling, general and administrative expenses ("SG&A") were approximately
the same on a quarter to quarter basis. In the few instances where 1999
expenses, such as expenditures for information systems upgrades, exceeded 1998
levels, certain other expense categories in 1999, such as agents' commissions,
were lower than 1998 levels. Overall, there was little variation in SG&A
expense categories in 1999 compared with 1998.
Results in the first quarter of 1999 included a $0.1 million tax provision as
compared to $0.5 million in the first quarter of 1998. The effective tax rate
in the first quarter of 1999, excluding restructuring, was 32.5% as compared to
23% in the same period in 1998. The restructuring charge provided a tax benefit
of $0.2 million due to absence of adequate net operating loss carrybacks in the
United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
The Company is obligated under a $50 million private placement of senior notes
with principal payments due from November 2001 to November 2006, as well as
other long-term debt amounting to $23.2 million.
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<PAGE>
$5.2 million of the $23 million matures in October 1999. Management expects to
refinance the $5.2 million when it comes due or, alternatively, could utilize a
portion of the revolving credit agreement discussed below. The Company also has
a $30.0 million three-year syndicated multi-currency revolving credit facility
with four banks, which expires in November 2000. 65% of the shares of certain of
the Company's foreign subsidiaries are pledged as security under the private
placement and $30.0 million lines. In addition to the revolving credit facility,
the Company has $30.6 million in lines of credit with various banks located
outside of the United States. As of March 31, 1999, the Company has not borrowed
any amount under the revolving credit facility, but has utilized $5.5 million,
including $3.1 million for performance bonds, of the $30.6 million foreign banks
lines. Under the most restrictive loan covenant agreement, the Company can
borrow another $10.8 million before exceeding the covenant limitation.
Management believes that it has sufficient borrowing capacity to meet its
foreseeable cash needs while still complying with its various loan covenant
requirements.
At March 31, 1999, the Company's outstanding indebtedness was $75.6 million
(including the current portion) of long-term debt, which includes $2.4 million
of short-term debt. The Company's cash and cash equivalents at March 31, 1999
were $5.5 million. At March 31, 1999, the annual maturities of the Company's
long-term debt for the period from April 1 to March 31 were $9.1 million, $4.0
million, $12.3 million, $8.9 million, and $7.8 million for 2000, 2001, 2002,
2003, and 2004, respectively, and $31.1 million thereafter.
Cash Flow. Net cash used in operations in the first quarter of 1999 was $3.0
million, as compared to net cash provided by operations of $6.5 million in 1998.
For the quarter ended March 31, 1999, net loss of $15.0 million decreased by
depreciation and other non-cash items of $19.6 million and was increased by
increases in working capital of $7.6 million. For the quarter ended March 31,
1998, net income of $1.8 million, increased by depreciation and other non-cash
items of $3.7 million and was further increased by decreases in working capital
of $1.0 million.
Net cash used in investment transactions in 1999 and 1998 was $2.9 million.
Capital expenditures in 1999 and 1998 amounted to $2.9 million and $3.0 million,
respectively. In addition, the Company conducted other insignificant investment
transactions that tended to offset each other.
Cash provided by financing transactions was $1.3 million during the first
quarter of 1999 and $0.6 million for the same period in 1998. Financing
transactions during 1999 consisted of an increase of $2.6 million in short-term
borrowings, offset by principal payments of long-term debt of $0.4 million.
Financing transactions during the same period in 1998 consisted of a $0.3
million increase in short-terms borrowings, offset by principal payments of $0.4
million of long-term debt.
Working Capital. Working capital of $93.7 million at March 31, 1999 decreased
from $110.6 million at December 31, 1998 principally due to a decrease in cash,
inventories, and receivables, offset by an increase in short-term debt and
prepaid expenses. Inventories increased to $83.8 million at March 31, 1999, a
decrease of $4.6 million from the end of 1998, and accounts receivable decreased
$0.7 million from December 31, 1998. In addition, total short- and long-term
borrowing of $75.6 million at March 31, 1999 compared to $74.7 million at
December 31, 1998.
Product Design and Manufacturing Engineering. The Company invested $3.8
million, or 4.6% of sales, and $4.2 million, or 5.0% of sales, respectively, for
product design and manufacturing engineering for the first quarters of 1999 and
1998.
FORWARD-LOOKING INFORMATION
This section and other portions of this report include certain forward-looking
statements about the Company's sales, expenditures, capital needs, remediation
expense with respect to Year 2000 issues and related matters, and various risks
and uncertainties, including those set forth in "Risk Factors". These risks are
discussed in "Risk Factors" in the Company's Report on Form 10-K for the year
1998, and, in addition, with respect to the Year 2000 and Euro Conversion issues
which are discussed below.
Page 11
<PAGE>
Such statements in the Report on Form 10-K and in this report are subject to
risks that could cause the actual results or needs to vary materially from those
anticipated by the Company.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer equipment and
software and devices with embedded technology that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company believes that Year 2000 disruptions could affect it in three areas:
(i) disruptions to the Company's internal systems; (ii) disruptions to the
Company's suppliers and customers; and (iii) problems with the Company's
products sold to customers.
Internal Systems. The Company has undertaken various initiatives intended to
----------------
ensure that its internal computer equipment and software will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "internal computer equipment and software" includes systems that are
commonly thought of as IT systems, including accounting, data processing,
telephone/PBX systems, servers and mainframes, and other miscellaneous systems,
as well as systems that are not commonly thought of as IT systems, such as
equipment at facilities, fixtures, alarm systems, fax machines, or other
miscellaneous systems. Both IT and non-IT systems may contain embedded
technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. Based upon its identification and
assessment efforts to date, the Company believes that certain of the internal
computer equipment and software it currently uses will require replacement or
modification. The Company currently anticipates that its Year 2000
identification, risk assessment, remediation and testing efforts with respect to
internal systems will be completed by mid-1999, and that such efforts will be
completed prior to any currently anticipated impact on its internal computer
equipment and software. The Company estimates that as of April 30, 1999, it had
nearly completed the initiatives that it believes will be necessary to address
potential Year 2000 issues relating to its internal computer equipment and
software. As of April 30, 1999, an audit of the internal computer equipment and
software resulted in a less than 1% occurrence of potential failure due to Year
2000 related problems. These potentially problematic systems are being
corrected as they are recognized by means of replacement. The Company currently
estimates that the cost for remediation of its internal computer equipment and
software, including the inspection costs at its facilities, will not exceed $2
million. Should the Company's remediation efforts regarding its internal
computer equipment and software prove not to be fully adequate, the Company
would have to operate manually or outsource their internal operation until
proper remediation efforts gave way to renewed automation. The cost associated
with any such outsourcing of finance and accounting efforts has not been
determined at this time. In the event that there exists Company facilities and
shop floor Year 2000 issues which remain unresolved and the Company is required
to shut down certain facilities, the loss accrued as a result of a facilities
shutdown could have a material adverse effect on the business and results of
operations of the Company.
Suppliers and Customers. The Company has created and distributed two waves of
-----------------------
Year 2000 supplier readiness surveys for all of its facilities, and has created
a Year 2000 Readiness survey to be distributed to all of its known customers.
The surveys have four purposes: (i) to assure the Company that its customers
and suppliers are fully aware of the Year 2000 issues and their ramifications;
(ii) to determine the extent to which interfaces with suppliers are vulnerable
to Year 2000 issues and whether the products and services purchased from such
suppliers are Year 2000 compliant; (iii) to assure the Company that the flow of
new equipment orders, as well as service and warranty orders will be
substantially uninterrupted by the Year 2000 problem; and (iv) to assure the
Company that the Year 2000 problem will not create an inability on the
customer's part to pay invoices in a timely manner. Although the Company
recently completed a major supplier consolidation effort, there still exist a
limited number of sole sources of supply for certain components used by the
Company. The Company is focusing on critical, single source suppliers for the
purpose of scheduling meetings and supplier audits for the purpose of Year 2000
compliance verification. In the event that these single source, critical
suppliers are not compliant in advance of the turn of the century, and in the
event that the areas of non-compliance
Page 12
<PAGE>
will affect the Company, the supplier re-sourcing process will commence. The
Company currently estimates that the cost and time to benchmark and re-source a
supplier, if a single source supplier, could materially affect the business.
Should a customer be in a non-compliant situation with regard to only their
internal systems, aside from the cost of inconvenience, the Company believes
there would be minimal additional costs to transacting normal business with
them. In the event that the non-compliance issues were customer shop floor
and/or facilities related, the ramifications could be materially greater.
Products. Software in some of the Company's products is date sensitive and
--------
therefore subject to Year 2000 issues. There are no date sensitivities known in
any other facet of the Company's products. The Company believes that the
software in its products currently being shipped (since mid-1998) is Year 2000
compliant (with the exception of a Y2K remediation patch currently under
development, and soon to be released, for one narrowly used product). Older
products, however, that may be subject to date sensitivities in the software are
not or may not be Year 2000 compliant, and the Year 2000 compliance of such
products must also be evaluated by the customer in light of the Year 2000
compliance status of the customer's specific computer and operating system that
are being used by the customer to obtain the benefits of the Company's products
in the customer's manufacturing/assembly operations. Software is divided into
three (3) main categories and remediations means. The category of current
products includes products shipped by the Company since mid-1998. All of these
products are fully supported, have been tested for Year 2000 compliance, and are
believed by the Company to be Year 2000 compliant. The category of supported
products includes products shipped by the Company prior to mid-1998. These
products may not have been tested for Year 2000 compliance and may be subject to
Year 2000 related failures to some degree. These products are supported to the
degree that there are updates available to the customer which have been tested
and are believed by the Company to be Year 2000 compliant. The category of non-
supported products includes products whose production has been discontinued.
These products have not been tested for Year 2000 compliance by the Company and
are not supported with Year 2000 compliant updates. The Company supports
customers using these products to the extent that software upgrades are
available which have been tested and are believed by the Company to be Year 2000
compliant.
Contingency Plan. The Company's contingency plan for dealing with the most
----------------
reasonably likely worst case scenario resulting from the failure by the Company
and certain third parties to complete efforts necessary to achieve Year 2000
compliance on a timely basis is still under development, but nears completion.
The draft will be made available for review by the Company's officers by May 30,
1999, at which time adjustments may be recommended. The contingency plan would
permit the Company to continue close to normal business operations and recognize
only minimal losses.
The costs of the Company's Year 2000 identification, assessment, remediation
and testing efforts and the dates on which the Company believes it will complete
such efforts are based upon management's best estimates. These estimates were
derived using numerous assumptions regarding future events, including the
continued availability of certain resources; customer, supplier, other best
practice third-party remediation plans, and other factors. There can be no
assurance that these estimates will prove to be accurate, and actual results
could differ materially from those currently anticipated. Specific factors that
could cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues, the ability to
identify, assess, remediate and test all relevant computer codes and embedded
technology, and similar uncertainties. In addition, variability of definitions
of "compliance with Year 2000" and the myriad of different products and
services, and combinations thereof, sold by the Company may lead to claims whose
impact on the Company is not currently estimable. No assurance can be given that
the aggregate cost of defending and resolving such claims, if any, will not
materially adversely affect the Company's results of operations.
EUROPEAN MONETARY UNION
Effective January 1, 1999, eleven of fifteen member countries of the European
Union ("EU") are scheduled to establish fixed conversion rates between their
existing sovereign currencies and a common currency, the "Euro". During a
transition period from January 1, 1999 to June 30, 2002, non-cash transactions
may be denominated in either Euros or the existing currencies of the EU
participants from January 1, 1999 to January 1, 2002. After January 1, 2002,
all non-cash transactions must be denominated in Euro. Euro currency will not
be issued until January 1, 2002, and on June 30, 2002, all national currencies
of the EU participating countries will become obsolete.
The Company has significant operations in several of the EU countries that
will convert, or that may convert, to the Euro. The introduction of the Euro on
January 1, 1999 may present substantial risks to the Company for its operations
located in the EU participating countries. These risks include competitive
Page 13
<PAGE>
implications of conversion resulting from harmonization of pricing policies and
practices in our European operations; possible increased costs associated with
the conversion; and the ability to modify existing information systems on a
timely basis, if at all, as well as the ability to absorb the costs associated
with the systems modifications, if required.
The Company has established various policies to be implemented during the
transition period. The Company has taken a position on pricing policy.
Essentially, Euro pricing will be provided if requested by customers; otherwise,
pricing will continue in legacy currencies. This pricing policy will apply to
both Euro and non-Euro countries. For accounting purposes, the Company will
treat the Euro as any other currency while maintaining its accounts records in
legacy currency. All affected locations have been contacted about their ability
to manage the required triangulation when converting from one legacy currency to
another. Although the present accounting systems do not handle triangulation,
the calculation is being done using commercial software. All of the Company's
banks are providing dual statements and can accept and make payments in both
legacy currency and Euro.
The Company's current business operating software is not Euro compliant.
Management is conducting an evaluation of alternative software that will enable
it to process Euro translations and believes that all matters will be resolved
prior to the mandatory implementation date.
Page 14
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
A. See Exhibit Index annexed.
B. No Form 8-K was filed during the quarter ended March 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN & SHARPE MANUFACTURING COMPANY
By: /s/ Andrew C. Genor
-------------------
Andrew C. Genor
Chief Financial Officer
(Principal Financial Officer)
May 13, 1999
Page 15
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
EXHIBIT INDEX
-------------
27. Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,532
<SECURITIES> 0
<RECEIVABLES> 101,753
<ALLOWANCES> 3,541
<INVENTORY> 83,815
<CURRENT-ASSETS> 7,771
<PP&E> 140,588
<DEPRECIATION> 90,457
<TOTAL-ASSETS> 296,234
<CURRENT-LIABILITIES> 105,167
<BONDS> 0
0
0
<COMMON> 13,515
<OTHER-SE> 91,456
<TOTAL-LIABILITY-AND-EQUITY> 296,234
<SALES> 82,414
<TOTAL-REVENUES> 82,414
<CGS> 61,243
<TOTAL-COSTS> 34,834
<OTHER-EXPENSES> (110)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,411
<INCOME-PRETAX> (14,964)
<INCOME-TAX> 83
<INCOME-CONTINUING> (15,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,047)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
